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What Is a Down Payment?

In Germany, a typical down payment for a house is 40 percent of its purchase price.
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  • Written By: Brendan McGuigan
  • Edited By: Niki Foster
  • Last Modified Date: 08 September 2014
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A down payment is a portion of available money given at the outset of a loan to demonstrate commitment to the purchase. It is often given in cash, though in some cases it may be attached to an alternate line of credit. This money is usually only used in sales that involve a large amount of money. Loans to purchase houses and land are the most common loans to require such a payment, though loans for cars, boats and other luxury goods purchased on credit may also ask for a portion of the total cost up front.

The down payment system exists because a link has been shown between the amount of real investment a borrower has in their purchase, and their fidelity in continuing to make payments regularly until the full amount owed has been settled. This payment acts as a sort of insurance for lenders, since borrowers know that if they default on their loan, they will lose not only the property they were purchasing, but also the money that they put down. The traditional down payment for a house in the United States has been 20%, an amount that is sufficient to tie most people to their loans. In recent years, however, upward-spiraling property costs have made saving up 20% difficult, if not impossible, for many families.

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Various incentive programs and more complex lending solutions, which may bring the down payment needed down to nothing, now exist for first-time buyers and veteran buyers alike. The 80-20 loan arrangement is one that has become relatively popular, in which the first 80% of the loan is taken out as a first mortgage, and the remaining 20% is taken out as a second mortgage, leaving the buyer with no down payment commitment, simply less beneficial terms than they might otherwise have. Interest-only loans are another path which may allow a buyer to pay a substantially smaller payment than 20% — often as low as 3-6% of the total cost.

Down payment "grants" also exist through non-profit organizations such as Nehemiah and AmeriDream. These organizations use a loophole in US housing regulations that prohibits a seller from giving money directly to a buyer, and grant money to the buyer — usually with a slightly higher final price as a trade-off. While the traditional 20% seems high to many Americans, many other developed nations have much higher average down payments. Mexico has a 30% average, Germany a 40% one, and Italy a full 50% of the final cost.

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anon127616
Post 4

awesome article. Thanks. You should do one on mortgages.

anon80749
Post 3

With the amortization loan, can the owner go and get a loan against the house without us knowing? We have been buying for two years now?

jgonzalez
Post 2

when you give a down payment of 5,000 dollars to purchase a home but the financing does not go through is it reimbursable?

anon1367
Post 1

Regarding the Land contract, can the buyer get the lender to finance the 1st loan and the seller's finace the 2nd loan?

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